Many economists and investors expect a recession in the not-too-distant future, and while that’s not a given, the conditions could be coming together. The Federal Reserve has been sharply cutting the money supply and raising interest rates over the last 18 months to choke inflation. Inflation has fallen drastically, and it’s hard to see the employment picture staying as strong as it’s been.

For these reasons, many investors are considering what to invest in if a recession does arrive, letting them take advantage of low asset prices for a subsequent rebound. Here’s what some advisors and analysts think are the best investments to own coming out of a recession.

Top investments coming out of a recession

If you’re looking for investments that do well coming out of a recession, it’s important to understand what the economic cycle looks like at that point. When economic growth bottoms, the economy is still very much in the midst of a recession. The news remains dour, and the usual signs of a recession remain evident and ongoing – but the situation as a whole is not getting worse. The Fed has begun lowering interest rates and may lower them further.

But for investors, the key point to understand is that the market is already looking forward.

“Typically by the time a recession has been officially announced, most publicly traded assets have already priced it in,” says Brian Spinelli, CFP, AIF, Co-CIO at wealth advisor Halbert Hargrove. “Stocks generally fall in advance of a recession announcement.”

Broadly speaking, the assets that rebound the fastest tend to be those that suffered the most going into a recession. Meanwhile, those that fared well going into a recession often lag coming out.

“Investments that generally price in the downturn of economic activity in advance are usually what rebound in the middle and coming out of a recession,” says Spinelli. The best rebounders don’t “wait to recover, and history shows they usually start to do so in the middle of a recession. By the time an ‘all clear’ is announced, those types of investments have already priced it in.”

Analysts suggest that you “run toward the fire,” meaning to assets that were hit hardest, as investors begin to understand the scope of the downturn and which companies are most likely to survive.

“The best types of investments coming out of a recession tend to be assets that were most sensitive to that particular economic downturn,” says Sam Davis, CFP, financial advisor at TBH Advisors. “In the Great Financial Crisis, investors that stepped into the bank stocks at very low prices were rewarded with very handsome returns during the corresponding recovery.”

So if you’re looking for the best bargains, you’ll need to consider buying them when the economy still looks pretty miserable and perhaps when your friends think you’re a bit crazy for doing so.

The following areas are traditionally strong recovery plays, and those willing to invest may find attractive index funds that can rise strongly, without having to analyze individual stocks.

Cyclical stocks

Cyclical stocks are virtually the definition of stocks that get hit hard going into a recession, as investors anticipate a peaking economy and begin to sell them. As customers of these businesses cut back, profits can fall significantly, and the stock often declines even faster.

“If you have a little time on your side, this is a great spot to look into consumer discretionary funds as they will do very well in the expansion phase and buying them a few months ahead of time will offer great opportunities,” says Billy Voyles, RICP, founder of Fundamental Wealth Designs, a wealth advisory in the Minneapolis area.

The consumer discretionary sector includes travel, restaurants, apparel and leisure. They’re some of the first areas where consumers trim expenses when times get tougher. It’s easier to own a swath of the sector’s stocks through some of the best consumer discretionary funds.

Other cyclical sectors can include some types of manufacturing and construction.

Small-cap stocks

Small-cap stocks are another area that tends to perform poorly going into a recession but then may turn up as conditions are not as bad as feared. With less secure businesses and less financial stability than large-cap stocks, often even the best small-cap stocks get hit early.

“The equities which performed best coming out of prior crises were typically small- and micro-caps with low P/Es and higher levels of debt,” says Douglas M. Stokes, CFA, managing partner with Stokes Family Office. “Why? Because the market is expecting companies with these characteristics to go bankrupt.”

Small-cap stocks can deliver attractive returns over time, but given the extra risks in the sector, it requires more work to understand if the opportunity is worth it. Of course, some of the best companies start as small-caps before ultimately becoming mid- and large-caps over time.

If you don’t want to do the legwork, it’s easier to stick with one of the best small-cap ETFs.

Growth stocks

While many small-caps are growth stocks, they’re not the same, though they may have some similarities going into a downturn. Many growth companies have rapidly expanding markets, but the company may be burning cash as it grows. So investors may be quick to sell at the start of a recession, especially if the overall financial position of the company is not especially strong.

However, when financial conditions ease, investors may rush back to growth stocks for the next up leg of the cycle. And this can be particularly true for attractive markets such as software.

Real estate

Real estate can be an attractive play coming out of a recession, too. Typically, interest rates will fall and remain lower for some period of time, as the Fed keeps loose conditions to ensure that a recovery takes shape. So, it can be an attractive time to take on this type of debt. Plus, real estate markets may have yet to respond to low interest rates by raising the price of property.

Investors can win in a couple of ways here, with more attractive financing and relatively attractive pricing. Then as markets expand, property prices typically climb. With the leverage involved with real estate, the total returns to owners can rise much faster than the property’s actual price.

If you’re interested in investing in real estate, you can do so directly by buying property or through real estate investment trusts (REITs) and take much of the difficulty out of the process.

Beware of these 3 investments following a recession

Naturally, not all investments do as well as others coming out of a recession, and it may make sense to invest your dollars elsewhere at the start of a recession. It’s not that the types of assets below will do poorly, but they’re likely to underperform the market leaders.

“The assets which perform best going into the recession typically perform worse coming out of the recession,” says Stokes.

Consumer staples

When the economy weakens, many investors turn to consumer staples, those companies that offer products that consumers buy regardless of the economy – toothpaste, detergent and the like. So in many cases, these stocks tend to hold up better going into a downturn.

“Consumer staples are always a good ‘go to’ while heading into a recession and for that reason might be overvalued coming out of one and therefore something to avoid entering the expansion phase,” says Voyles.


It’s a similar logic for utility stocks as it is for staples. Few consumers are going to cut back much, if at all, on their use of electricity in a recession, so utilities have defensive characteristics. Utilities typically pay relatively large dividends, offering a cash return regardless of what happens in the broader market, and many investors turn to them for exactly this reason.

“Utilities are a safe play in a recession as everyone must still pay the bills to keep the lights on, but as you leave, there are simply going to be more opportunities to allocate to that offer more upside and growth in a recovery than utilities,” says Voyles.


Bonds are another investment that is going to tend to rise going into a recession, as investors anticipate the Fed lowering interest rates, a move that makes the price of existing bonds rise. That benefit plus the interest payment make bonds a tempting prospect moving into a downturn.

And with the Fed potentially continuing to lower rates for some time following the end of a recession, bonds may do alright, though not especially well. The total upside on bonds is usually much less than it is for stocks, so they’re an overall less-attractive pick. Plus, some of that gain is already priced in before a recession even starts, lowering the total upside on bonds.

“Investments that have been perceived as ‘safe’ like bonds and gold tend to perform more poorly as investors rush their money out of commonly considered safe-haven assets in order to take advantage of the newfound recovery in the stock market,” says Davis.

That said, bonds of companies priced for death may deliver strong returns if death does not arrive, suggests Spinelli.

Keep your ‘smart investor’ mindset during a recession

It can be nerve-wracking to invest during a recession because the market ends up being quite volatile when it’s in the process of changing directions. Some investors want to buy and get in quickly while others want to sell and get out quickly. If tracking the best sectors and trying to find the best place for your money all sounds a bit too much, you do have good options.

For many investors, the best advice is just to avoid the noise and keep on with your long-term investment plan, adding to the market regularly, such as through a 401(k) plan. Or perhaps you may be willing to invest more as stocks get cheaper, raising your potential forward return.

“Recessions are inevitable and investors really should be careful about making big changes to their portfolios during a recession,” says Spinelli. “There is a big risk in timing markets as [investors] most likely will want to sell after the pain and get back in after a recovery.”

If investors inadvertently do what Spinelli warns of, they’ll typically end up selling low and then buying back into the market at a higher price – the exact opposite of how you make money. And that gets to the key point for investors: you have to be right twice.

“The problem with ‘cashing out’ is you have to not only figure out where your pain point is to sell, but then also when to get back into the market,” says Davis. “Many people miss the boat on getting back in.”

“The best strategies tend to include dollar-cost averaging, continuing to stick with your financial plan and ignoring the noise,” says Davis.

Dollar-cost averaging involves adding money to the market regularly over time, regardless of what’s happening.

As for what to buy? Legendary investor Warren Buffett has long counseled investors to buy an S&P 500 index fund and then hang on. The index includes a broad diversification of industries and hundreds of America’s top companies, meaning it’s an investment in the American economy. It’s delivered about 10 percent average annual returns over time.

You won’t have to play the game of “timing the market” and worry too much about the economy.

“The important thing that investors should take away is that investing is not about predicting but rather preparing,” says Voyles. “We cannot predict the direction the market will take tomorrow, or next week, but we can work to have a plan that prepares us for whatever comes our way.”

Bottom line

While investors may be best served by sticking to their long-term game plan, they may be able to pick up some attractive investments during a recession. Still, investors should be careful about making huge changes to their portfolios in response to the pain of losing money. Instead, prepare ahead of time and plan to make smart long-term moves while assets are cheaper.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.